A Closer Look by Bankruptcy Chapter
With major problems in the retail sector and higher interest rates that limit options for businesses, chapter 11 cases more than doubled. Of course, some of that increase is due to related case filings, but even stripping that away, companies facing financial challenges are turning in significantly higher numbers to chapter 11.
Importantly, small businesses show continued signs of distress. For example, small businesses, which generally file under subchapter V, went up by two-thirds (67 percent) over last May.
It is somewhat remarkable that chapter 13 cases keep climbing even ahead of the traditionally more popular chapter 7 filings. These wage-earner repayment cases, filed most often to retain houses and cars, are particularly sensitive to interest rates because refinance alternatives to bankruptcy are not as viable any more. Interestingly, the stronger-than-expected jobs market may continue to make chapter 13 filings rise higher than chapter 7 because more wage-earners will have regular income to fund a repayment plan.
The largest number of cases continue to be filed under chapter 7, but the number of such filings was substantially depressed due to COVID-relief assistance which has now run out. With more than a 20 percent monthly increase over the previous year, chapter 7s continue their climb back to pre-pandemic levels.
Although there may be seasonal slow-downs in raw numbers of filings month-to-month, we should continue to focus on the difference from the same month in the previous year. By that measure, it is easy to predict that overall year-end filings will be substantially higher than in 2022. Even with an expected pause in interest rate hikes by the Federal Reserve, new credit is scarcer than it was a year ago and it is harder to repay existing debts taken out at high interest rates.
Department of Justice Projects Major Bankruptcy Filing Increase
Over the past many months, AIS commentaries have emphasized the likelihood of substantial increases in bankruptcy filings. This view has set us apart from many other commentators who expressed more tentative views. For those who think that AIS may have exaggerated its prognostications, read below. We have not been nearly as bold as the Department of Justice (DOJ)!
In its "FY 2024 Performance Budget Congressional Submission,” DOJ’s U.S. Trustee Program (USTP) provided bankruptcy filing projections to support President Biden’s appropriations request for next year.1
The USTP’ submission to Congress estimates that bankruptcy filings will experience a 75 percent increase between 2022 and 2024 and then continue higher until they reach pre-pandemic levels – which is double last year’s filing number.
The USTP makes the only official Executive Branch projection of bankruptcy filings each year. It does so as part of federal budgeting requirements, which require estimates of workload and revenues from case filings and quarterly chapter 11 fees. The USTP does not perform economic modeling, but traditionally bases its estimates on slope lines reflecting recent trends. The USTP concludes that "modeling filings on a gradual increase to [pre-pandemic] levels, filings could double in the next three years.” (DOJ/USTP FY 2024 Performance Budget, p. 18.)
If DOJ is right, then the rollercoaster will continue to steeply climb until it reaches about 800,000 filings.
The Broader Economic Context
As aggressive as the DOJ/USTP estimates appear to be, they are supported by most economic data. Here is a round-up of some of the more salient economic news during May:
- As widely reported, the escalating number of "Big Box” and other corporate bankruptcies continues as national retail businesses increasingly seek relief. Even beyond retailers, the financial press widely covered an S&P Global report calculating that, in the first four months of this year, the number of large bankruptcy cases reached its highest level since 2010.
- Also much ballyhooed in the financial press, the Federal Reserve reported that banks continue to tighten loan standards and expect to ratchet up requirements even more. Among other reasons, regional banks are tightening due to concerns about capital requirements which are unlikely to ease anytime soon.
- The Wall Street Journal (5/16/23) focused on another Fed Report showing that, in the first quarter of the year, debt balances that were 90 days or more delinquent jumped by 50 percent from the previous year. The WSJ further noted that things could get worse because payment of $1.7 trillion in outstanding student loan debt has been largely frozen, but may not remain frozen for much longer.
- On May 15th, The Hill, a Washington, D.C. insiders’ daily paper, published a deep dive analysis of Fed numbers and highlighted that first quarter consumer debt beat all records at about $17 trillion.
Conclusion
Lenders with national loan portfolios should expect a growing number of account delinquencies. The number of bankruptcy filings has been artificially low for more than two years and may now be doubling until filings reach sustainable pre-pandemic levels. This increase may strain lender resources because bankruptcy loan administration is often manual and more expensive. As the bankruptcy rollercoaster ride continues, we are on a steep climb, with perhaps a few drops along the way, before we reach an apex where we may stay for a while.
1 Fiscal Year (FY) budgeting reflects data from October 1 to September 30. For example, FY 2024 will start on October 1, 2023, and end on September 30, 2024. USTP estimates also exclude the six judicial districts is North Carolina and Alabama which are not part of the USTP.
